Market Commentary

In my view the FOMC meeting was a non event.
June 24, 2010

In my view the FOMC meeting was a non event.  As universally expected monetary policy was left unchanged.  Official assessment of real economic activity was downgraded marginally but the outlook for labor market conditions was upgraded.  The Committee signaled that European indebtedness may harm American growth but if financial markets “continue to stabilize” the impact should be “modest.”  The outlook for inflation remains benign.  The fed funds target was kept between zero and 25 bps and is expected to remain there for an “extended period of time.”

As widely discussed since April’s FOMC meeting the S & P has declined about 8% and the economic data has been “soft.”

Speaking of soft data, new home sales plunged to a record low in May.  While most don’t believe the data is as horrific as suggested as there was perhaps some payback for sales drawn forward because of the tax credit, it was startling.  Because of weak sales the inventory to sales ratio rose to 8.5 months from April’s 5.8 level.  However the number of new homes available for sale fell again in May to 213,000, the fewest number since 1970.

Last week the market was disappointed with May’s housing starts, declining to 593,000 versus the consensus view of 648,000.  As noted many times approximately 1.5 million homes needed be started annually to meet normal demand.  Starts have been below this number since December 2006 and have averaged 641,000 since the housing crisis became catastrophic in June 2008.

My point is simple.  As per the US census the population has increased about 50% from 1970, growing at annual rate of 1.2%. [203 million to 309 million]  The number of new homes available for sale is at a 40 year low.  New home construction has imploded.  Many are extrapolating yesterday’s activity into tomorrow.  It is just a matter of time based innate demand that construction/sales must turn up to replenish depleted inventories.

Many will point to the infamous “shadow inventory.”  As all know real estate is local.  The shadow inventory in Detroit is huge.  So is it in some of the over built markets of the south, southwest and resort communities.  However time and prices will resolve even these regions.

I reiterate yesterday comments that housing may follow the same path as autos…increase, sharp decline following the end of incentives and then moderate sustainable rebound.

Wishful thinking?  It is not change that occurs but rather the velocity of change.

Speaking of change all markets were relatively quiet yesterday.

What will occur today?  Durable goods and initial jobless claims are released.

Last night the foreign markets were moderately lower.

The Dow should open moderately lower on economic concerns.  The 10-year is up 15/32 to yield 3.08%.